RBA could cut rates to offset mortgage repricing

One leading economist believes the Reserve Bank could still cut the cash rate next year, despite recent speculation that the cash rate would rise in 2017.

There were no surprises this week when the RBA announced rates would be left on hold.

AMP Capital chief economist Shane Oliver said that while the tone of governor Philip Lowe’s statement was neutral, it was still “way too early” to rule out further rate cuts next year.

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“The risks to growth are on the downside. Inflation is likely to remain below target for longer than the RBA is forecasting as wages growth remains weak,” Mr Oliver said.

“The RBA may also need to offset increases in bank mortgage rates that are being driven by the rise in global bond yields.”

Mr Oliver said the Australian dollar remained too high.

“So we are allowing for one rate cut in the first half of next year. Regardless of whether there will be further cuts or not, a rate hike remains a 2018 story at the earliest.”

Mr Oliver’s comments came after a recent RateCity.com.au analysis of more than 30 key economic indicators suggested that the Reserve Bank’s easing cycle had ended, and the likelihood of a rate hike next year was mounting.

“Australians should get ready for rates to go up next year to cool our hot housing market,” RateCity.com.au data insights director Peter Arnold said.

Mr Arnold said banks have already started moving their fixed rates higher, with Westpac the first major to do so.

“With that, many lenders [are] moving fixed rates up. It’s the best sign that we have that a variable hike is on the way,” he said.

Mr Arnold pointed to findings from international forecasters, namely the OECD, which said that rate hikes were needed to “unwind tensions from the low-interest environment, notably in the housing markets”.